Does FANG Make Sense After A Rate Hike?

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Includes: AMZN, FB, GOOG, GOOGL, NFLX
by: Dana Blankenhorn

Summary

Alphabet may prove the strongest of the FANGs after a rate hike.

Netflix and Amazon both hold debt, and their costs will rise.

Facebook has an increasingly international focus; those profits will depreciate.

It seems a foregone conclusion that the Federal Reserve will hike interest rates about 25 basis points in December. They want to get interest rates off the "zero bound." Call it a "return to normalcy."

A lot has already been written about the impact this will have on particular stocks and groups of stocks. Manufacturers won't like it. Homebuilders may get a pop, then a decline. Banks will be in clover.

But this will also impact the FANG stocks - Facebook (NASDAQ:FB), Amazon.Com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (Alphabet) (NASDAQ:GOOG) (NASDAQ:GOOGL) - in different ways.

For Alphabet, the rate hike will provide bigger returns on cash located in the U.S., and a powerful incentive to repatriate some of its profits. While most analysts focus on the cash implications of moving money onshore, the fact is that dollars are providing a return against every other major world currency, and are likely to continue to do so.

CFO Ruth Porat is better known today for creating the Alphabet structure, but her management of the company's cash is where she will really be tested. My guess is she will pass the test.

Facebook has nothing like Google's cash position, and the proportion of its income being earned outside the U.S. is increasing. But this is also where Facebook is doing most of its investment, which means it's putting increasingly valuable dollars to work where they can get a lot done. Facebook does not have any debt, and will not be impacted by rising interest rates, so the impact on the company is likely to be negligible. That doesn't mean the stock won't move. It will move positively against companies with high debt levels that are hurt by the rate hike.

Netflix, unlike Facebook and Alphabet, has considerable debt, about 25% of assets. It can, however, discharge the long-term debt - $2.4 billion - with the $2.6 billion of cash on hand and short-term investments on its books at the end of September. The biggest problem is that its positive cash flow comes from financing, not operations, and a lot of those operations are in other countries, whose currencies will continue to weaken. I would term the impact here as slightly negative.

Amazon brought in $3.5 billion of operating cash flow during the most recent quarter, but took more than that in cash flow investing losses. The company's balance sheet shows long-term debt which, like that of Netflix, could be paid back with cash on hand. The problem is that its operations are increasingly international, thus its profits are increasingly international, and many of those profits disappear when they're imported, as in this case they must be in order to balance the books. Thus I think Amazon will be hurt more than people now know from a rate hike - not enough to offset what it's doing in other areas, but enough so that some investors will take profit and the stock will likely go nowhere.

A disclosure at the bottom of this piece notes that while I own shares in Amazon and Alphabet in my retirement account I have no holdings in Netflix or Facebook. That's because I don't have a Netflix subscription and hardly ever visit my Facebook account. I don't feel knowledgeable enough about either company to make a definite call on them, although I feel exceedingly bullish on Facebook, less so on Netflix. I'm going to hold my Alphabet and Amazon, even if the latter weakens slightly relative to the market - I took out some Amazon profits early this year and feel inclined to let the rest ride.

Disclosure: I am/we are long AMZN, GOOGL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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